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05 May 2006

Spanish Property Bubble

Spanish Property BubbleDefinition: A property bubble is characterised by rapid increases in property prices until they reach unsustainable levels relative to incomes, other economic factors followed by a rapid decrease in prices resulting in negative equity (mortgage debt is higher than the value of the property itself). It means many people are priced out of the market and real estate prices either have to drop to get the market moving or incomes need to increase to afford the high prices.

So is this the case in Spain?

Mark Stucklin of Spanish Property Insight has written very comprehensive information regarding this matter. Here is a quick synopsis:

After running a poll on their website, Spanish Property Insight obtained the following results from property buyers (71% of which are British, 11% Spanish, 6% Irish, 12% other) showing that foreigners are more divided on this question, with 57% saying there is a bubble, and 43% saying there isn't. When Spanish votes are included, the figures are 61% saying there is a bubble and 39% saying there isn't, almost the same as the British vote when isolated from other nationalities. To demonstrate their discontentment with state of Spanish property prices, on May 14th, young Spanish people are planning a mass sit-down demonstrating against the high level of property prices as reported by Euro Weekly News.

Have your say in our poll below:
[poll=1]

It appears that the consensus is that a bubble does exist, but on what grounds?

Prices of Spanish property prices have risen to record levels since 2000, it became the must have of the last few years and many investors/home buyers have bought in Spain, with large concentrations of buyers in the coastal areas of the Costa del Sol and the Costa Blanca. Many investors have bought with the expectation that property prices would keep going up enough for them to sell up and make a healthy profit. The reality at present is that this isn’t possible in many cases, with many reports of property prices falling on the Costa del Sol and parts of the Costa Blanca. As the market is so slow, owners who need to sell are reducing prices to attract buyer interest. However remember that not all parts of Spain are in this scenario, the less popular areas of Costa de la Luz, Costa Tropical and Costa Dorada are still seeing good growth.

Factors for popularity of Property in Spain:

Low real interest rates
Spanish mortgage market has opened up
Incomes have been rising
Changing demographics and lifestyles
Foreigners buying in Spain
Property is a good investment
Travel time from most of Europe is short
Fashionable to have a second home

The Overseas Property industry in recent time is now a growing global market with investors and homebuyer shifting their buying power to new emerging markets, the likes of Dubai, Bulgaria, Morocco and Cape Verde. This has had a knock on effect as the pool of people buying in Spain has shrunk. This is evident in the commercial marketplace as many Spanish Property companies have expanded to sell in many hot property markets all over the world!

My thoughts...

It has been reported that the Spanish Government has proposed that non-resident capital gains tax will be slashed from 35 per cent to 18 per cent as of January 1, 2007. This is not set in stone yet, as it hasn’t been passed as law, but it is expected. The property selling costs in Spain have always been high and have led to a black economy in second hand property and are helping the stagnating market Spain has at present in its most expensive areas. So is the government’s trying to soften the bump for the Spanish Property market?

Over time I believe that owners in Spain will see good returns on their investments, but people have to be realistic, a property in Spain is not for Christmas, it is a longer-term investment.

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Housing Bubbles are a hot topic all over the world. Will they burst, what does that mean for me etc…. As each market becomes intertwined into the global economy, a change in the US can affect the Spanish market for example. I have gathered some references below that discuss other reasons for property bubbles (US biased):

http://housingpanic.blogspot.com/
http://overvalued.blogspot.com/
http://crash2006.blogspot.com/
http://economicrot.blogspot.com/
http://www.economist.com/finance/displayStory.cfm?story_id=4079027
http://www.businessweek.com/bwdaily/dnflash/jun2005/nf20050622_9404_db008.htm
Category: Spanish Property

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